Community Bank CEO on Reforming Dodd-Frank: Separating the Wheat from the Chaff

Since the election, there has been a lot of talk about changing Dodd-Frank, the bill enacted after the 2008 financial crisis designed to prevent a similar economic “meltdown” from occurring.

So what would be the best course?

We get this commentary from David R. Misch, Chief Executive Officer of Community Bank:

Neither political party wants another Great Recession. No one wants the large, multi-national banks to fail and take down the system. The best way to prevent that from happening is to require the largest banks that are “too big to fail” (and perhaps some others) to continue to increase capital levels. This is a part of Dodd-Frank that should remain intact. Perhaps in exchange for less regulatory burden in terms of modeling and stress testing.

Several other reforms to Dodd-Frank would also make sense and not alter the original intent or goals of the legislation. Such reform should focus on unburdening community banks. After all, it was not the community banks that either caused the problem or pose systemic risk to the financial system. Such reform should target:

1) Residential first mortgages. The legislation, as currently enacted and enforced, makes it very difficult and costly for community banks to provide this product. First mortgages are at the heart of community banking and making it hard for small banks to do residential first mortgages does not makes sense given the significance of the role these smaller institutions play in their communities. Many “money good” loans are not being made by community banks because they are prohibited from doing so. They get done…but at very, very high interest rates by non-bank providers. Shouldn’t the local community bank be doing these?

2) “Tailored” regulation and enforcement. Dodd-Frank should be “tailored”—both in the actual statutes and in how the regulators enforce those statutes—such that the regulations are either reduced or eliminated the smaller and less complicated the bank is. Too often there is regulatory “creep” whereby the concepts applied to a big bank are applied to a small bank regardless of the actual law.

3) Asset Threshold Common Sense. Today, they are certain “breaks” in asset size where enhanced regulations apply. The larger the bank, the more the regulation. Two key thresholds are the $10 billion and $50 billion levels. This creates all kinds of “funky” behavior as banks dance around or blow through these limits. How about doing it by the nature of the business? A $10 billion community bank that issues CD’s and does consumer mortgages is different, and arguably less risky, than a $5 billion bank doing construction real estate loans.

4) Expanded Community Reinvestment Act (CRA) Opportunities. Much of the CRA service requirements focus on financial literacy. Building a home for the homeless, teaching someone how to read, feeding the hungry, etc. are amazingly difficult to get CRA credit for. While not specifically Dodd-Frank related, reform along these lines would make an impact in our communities and expand the much-needed role banks play in the community.

In summary, Dodd-Frank has its merits. But like everything else, it has its weaknesses. Addressing the latter, without destroying the former, could go a long way in helping the regulators, banks and consumers work together to grow our economy safely and at a faster pace.

Community Bank (OTC: CYHT) is an independent and family-owned regional bank with assets of $3.6 billion and 17 locations throughout Southern California. Founded in 1945, Community Bank utilizes its experience, suite of financial services and unique Partnership Banking® approach to help its clients grow and succeed. For more information on Community Bank, go to www.cbank.com Member FDIC.